QUESTION $7$

Graceland Inc intends to build a processing plant in a local community. You have been

asked by the management of Graceland to perform a feasibility analysis of the project to

determine its viability. Your preliminary assessment shows that the construction of the

plant will take two years at an estimated cost of GHS $140,000.$ It has been established

that $60\%$ of the investment cost will be paid in Year $1$ and the remaining $40\%$ in Year $2.$

Production will start at the beginning of Year $3$ and annual production cost will be

GHS$15,000$ per year. Operation and Maintenance cost which begins in Year $3$ will be

GHS$5,000$ each year. It has been estimated that Cash Inflows to be generated by the

factory will be as follows: Year $3=$ GHS $45,000$; Year $4=$ GHS $55,000$; Year $5=$ GHS $55,000$;

Year $6=$ GHS $55,000$; Year $7=$ GHS $55,000$; and Year $8$ to Year $10=$ GHS$50,000$ per year. It

has been assumed that the project life span will be $10$ years with a salvage value of

GHS$18,000.$

Required:

a$.$ Using a discount rate of $12$ percent, advise the Assembly on the project using the:

i$.$internal rate of return$($IRR$)$

II$.$ MODIFIED RATE OF RETURN $($MIRR$)$